My musings on Twitter are mostly a stream of poking fun of corporatist takes in The New York Times or The Economist. Every once in a while, for reasons that are impossible to understand, a tweet takes off, like this one, which mocked a far-fetched inflation theory propagated in a guest essay for the Times on July 8.
Under this theory, elevators and the elevator union are to blame for the housing affordability crisis. The most charitable interpretation, which the title of the piece nearly rules out, is that the high cost of elevators are emblematic of other supply problems exacerbated by onerous regulations. The tweet was retweeted over one thousand times. It seems that the progressive community took umbrage at the Times for breathing life into a YIMBY story that deflected attention away from the powerful companies actually setting rents and towards (largely powerless) elevator workers.
Some of the quote tweets were supportive, and some were not so kind. Matt Yglesias called me a “leftist professor” who “just resorts to bullying” his opponents, and even intimated that I was insensitive to the plight of the disabled community. (Perhaps he was miffed at a prior column.) Of course, the disabled care about access to elevators, but my tweet spoke to the price of housing, and profit-maximizing landlords should not, as a matter of economic theory, factor the fixed cost of elevators into their pricing decisions.
It would be nice for the Times to give some attention to an alternative and more plausible hypothesis behind the housing affordability crisis—namely, that hedge funds and private equity firms have been buying up properties that would otherwise go to households, creating an artificial scarcity in real estate markets, and thereby driving up rents. Matt Darling, who sports a globe emoji in his Twitter handle but is otherwise a decent fellow, questioned whether this alternative hypothesis was serious: “It seems unlikely to be a driving force – there are 146,375,000 houses in the United States. I’d be surprised if private equity buying ‘hundreds of thousands’ is a major contributor.” I promised him I would look into the matter. Here is what I found.
Investors Have Been Busy Gobbling Up Homes
In the first three months of 2024, investors bought 14.8 percent of homes sold according to Realtor.com. In some cities, such as Springfield, Kansas City, and St. Louis Missouri, investors purchased around one in five homes. Investor-owned homes hit their peak in December 2022, accounting for 28.7 percent of all home sales in America. Per MetLife Investment Management, institutional investors may control 40 percent of U.S. single-family rental homes by 2030.
Robert Reich posted a wonderful video to Twitter explaining how Wall Street investors could be driving up rents. He explains that home ownership—the primary vehicle for accumulating wealth—is out of reach for many Americans. Investors are not randomly making home purchases across the country, as Darling’s question above presumes, but instead are targeting bigger cities and neighborhoods that are homes to communities of color in particular. In one neighborhood in Charlotte, North Carolina, Wall Street investors bought half the homes that sold in 2021 and 2022.
Such clustering of properties is occurring in several U.S. cities. A report from Drexel’s Nowak Metro Finance Lab found that between 2020 and 2021, 19.3 percent of sales of single-family homes in Richmond, Virginia, went to investors. It found that investors bought nearly a quarter of the homes in Jacksonville, Florida in the same period.
But Are These Investments Enough to Raise Housing Prices?
Economists have recently begun to explore the relationship between institutional investment and home and rental prices.
- Researchers at the Federal Reserve Bank of St. Louis (2020) found that purchases by institutional investors, as measured by the share of properties owned by all institutional investors collectively in a Metropolitan Statistical Area, increase (1) the price-to-income ratio, especially in the bottom price-tier, the entry point for first-time buyers, and (2) the rent-to-income ratio generally, especially where the housing supply elasticity is high. By treating all institutional investors in the aggregate and thus as if it were owned a single entity, however, the St. Louis Fed study may have overlooked the incremental explanatory power of clustering properties by a single institutional owner in a given neighborhood.
- Watson and Ziv (2021) analyze the relationship between ownership concentration and rents in New York City, finding that a ten percent increase in concentration is correlated with a one percent increase in rents.
- Using a database comprised of all multifamily real estate transactions of greater than $2 million, Tapp and Peiser (2022) estimated the distribution of Herfindahl-Hirschman Indices across all Opportunity Zones within the United States, showing that investors have grown to consolidate a growing share of the affordable rental housing market.
- Linger, Singer and Tatos (2022) used a property tax data from the Florida Department of Revenue to calculate the individual market shares for owners of rental properties based on the number of units owned. For each Census Tract in the state, they calculate the consolidation of properties from 2015 through 2022, and then test whether such consolidation explains increases in rental prices or increases in rental inflation or both, controlling for other factors that might confound the concentration-inflation relationship. They find statistically and economically significant effects in both relationships.
- Using mergers of private-equity backed firms to isolate quasi-exogenous variation in concentration of ownership at the neighborhood level, Austin (2022) found that shocks to institutional ownership cause higher prices and rents.
- Coven (2023) estimated a demand system to study the effects of institutional investors’ conversion of large fractions of owner-occupied housing into rentals in the suburbs of U.S. cities. He finds that institutional investors decreased the housing available for owner-occupancy by 30 percent of the homes they converted, and their demand shock raised the price of housing purchased. He also found such behavior made it easier for renters to access neighborhoods that previously had few rentals.
A seminal lesson in industrial organization is that price coordination is easier, all things equal, when markets are concentrated. Indeed, merger enforcement is partially motivated by the prospect of coordinated pricing effects that flow a merger. So it shouldn’t surprise to anyone that, as institutional investors buy up the available stock of housing in a local market, housing prices rise.
An interesting development that might diminish the impact of clustering properties in a given neighborhood under a single roof, however, is the widespread adoption of pricing algorithms by third-party information aggregators. In March 2024, the Department of Justice opened a criminal investigation of RealPage, a top developer of property-pricing software. A class of renters as well as attorneys general from Washington, D.C. and Arizona brought lawsuits against the beleaguered software company. To the extent monopoly pricing can be achieved even by atomistic property owners via outsourcing the pricing decision to a third party, it might not be necessary to consolidate properties to exercise pricing power.
Policy Implications
In several European countries, such as Spain, Portugal and Greece, foreign investors were encouraged to buy property in exchange for a pathway to citizenship. The programs resulted in a flood of investment and speculation, causing rents to rise above what could be afforded by residents. The incentive plans have since been paired back, with countries hoping to re-direct investment into undeveloped pockets outside of the major cities.
The rather obvious economic lesson is that governments have an obligation to their voters, and free-market forces should not be allowed to price local residents out of their own neighborhoods. The same insight could be applied to domestic speculators in the United States.
In December 2023, Senator Merkley (D-Oregon) introduced the End Hedge Fund Control of American Homes Act, which would force large corporate owners to divest from their current holdings of single-family homes over ten years. Entities that fail to divest homes they own in excess of a 50-home cap would be taxed $50,000 for each excess home. And hedge funds would pay that fine if they own any homes at all after ten years.
Limiting the home ownership of hedge funds and other institutional investors makes economic sense, particularly in concentrated local real estate markets. Government funding of new housing projects also could address the imbalance between private supply and demand. Although it is generally unpopular among neoliberal economists and could weaken incentives to make further investments, capping rental inflation at five percent per year, as intimated by President Biden in this week’s NATO press conference, could also spell relief for renters. And pursuing common pricing algorithms under the antitrust laws could restore renters to the place they would have been absent the alleged price-fixing conspiracy, albeit with a significant lag, given the slow pace of antitrust.
All of these ideas are superior to focusing our energies on elevators. If only we could get the Times to listen.